The publication of the “Kremlin List” at the end of January was an anticlimax. So sanctions announced on Friday April 6 against seven Russian billionaires were a shock not only for the oligarchs themselves, but also for the entire Russian economy. The new sanctions didn’t just hit Putin’s friends who made their billions with state contracts inside Russia; they targeted the owners of multinational publicly traded companies and more importantly, penalised existing securities, not just the issue of new ones. The Russian market immediately felt the difference and fell heavily.
The Moscow Exchange index dropped by 9.4% from Friday to Monday after the announcement, a record loss not seen since March 2014, when Crimea was annexed. And the ruble fell by 11.8% vs. the U.S. dollar in just three days — also not seen since December 2014.
That was followed by US missile strikes on Syria a week later bringing the crisis to a crescendo, but within a few days both US president Donald Trump and Russian president Vladimir Putin began talks to attempt to walk the tension back.
The bottomline is that neither side want to go to war Putin’s bluff was called and he blinked. But the US also doesn’t want to go to war. The chaos caused by sanctioning Rusal both to the metal markets and to US pension funds that hold Rusal’s stocks and bonds was so severe that the US Treasury Department was forced to relax some of the terms of the sanctions two weeks later.
What happens next remains unclear as what became clear in the wake of the missile strikes is there is no unity in the US administration over what to do with Russia and that Trump is not in control of the various actors in the game, which have been making their own policy on the hop. All this means the volatility will continue, affecting IPO plans, investment plans and slowing the nascent Russian recovery.
Russia’s first quarter base sector indicators showed a bumpy ride in addition to disappointing March industrial output Rosstat statistics agency recently reported.
VTB believes that construction indicators could still improve, as early year construction numbers are less representative of the underlying trend, and the estimated jump in the construction value deflator might be overstating the contraction in actual volumes of activity.
On the demand side, retail sales growth picked up only slightly, with real turnover growth reported at 2% y/y. VTB argues that adverse weather conditions in March (on average 6° colder than last year) "were likely partly been behind the relatively modest acceleration in retail sales (compared to the trends in real wage growth)."
Alfa Bank on April 18 warned that the spike in real salaries reported for January-February did not continue in March, when real salary growth decelerated to 6.5% y/y versus 8.0% y/y consensus expectation. The analysts suggested that the rapid salary growth in Jan-Feb was a reflection of the pre-election period and is not sustainable for the full year.
Nevertheless, Alfa sees the scale of salary growth as still strong, noted that unemployment is only 5.0% and the aggregate banking sector retail loan book continues to grow. Given the new round of sanctions, Alfa Bank expects corporate loan growth to weaken in April-May.
Inflationary risks related to the sharp increase in salaries combined with the continuing recovery in retail lending activity and believes that the recent drop in the ruble exchange rate ony fuels additional inflationary risks.
The Ministry of Economic Development has revised the target industrial output growth for 2018 to 1.7% from previous 2.5%, while stopping short of downgrading the GDP forecast of 2.1%, Interfax reported on April 16 citing unnamed sources in the government.
Together with the new round of US sanctions hitting hard in April, March's disappointing industry results could lead to across-the-board revision of outlook on Russia for 2018. The ministry's target of 2.1% growth for 2017 underperformed at 1.5% GDP growth last year.
The bad news was offset by oil prices that rose to over $75 a barrel vs the $44 the budget assumes that lead to a surge in revenue for the government. The Russian budget breaks even at about $60 now so Russia Inc is in profit that makes it able to weather the sanctions pressure. The budget deficit was below 1% of GDP as of April.